Central banks best suited to issue digital currencies

By Aaran Fronda

A recent report by the Official Monetary and Financial Institutions Forum (OMFIF) said that central banks rather than private companies are better positioned to issue digital currencies, due to the public’s higher degree of trust in these institutions.

Respondents from almost all countries surveyed in the report indicated they would feel most confident in digital money issued by the domestic monetary authority, and expressed a lack of faith in digital currencies issued by tech companies.

“There is no doubt that the online ‘shells, grain or stones’ – cryptocurrencies such as bitcoin – are not a solution and neither is Facebook’s Libra,” CEO of G+D Currency Technology, Wolfram Seidemann said during a speech at OMFIF’s 10th anniversary reception.

“That is why government-issued digital currency has become such a widespread topic of discussion.”

Investors aren’t as keen as they once were in privately created digital currencies, with Facebook seeing key payment partners including Mastercard, Visa, Stripe, PayPal, and eBay all pull out of its cryptocurrency project amid increased scepticism from regulators.

“Ultimately, any central bank that issues a digital currency does so to meet specific policy objectives and will take a far more holistic approach compared to that of a private company,” said Bhavin Patel, senior economist and head of fintech research at the OMFIF. “For example, a central bank will pursue the issuance of a digital currency for the purpose of making payment systems more efficient or improving financial inclusion.”

“But with Facebook, it’s about increasing their market share and leveraging their channels of distribution rather than trying to meet a wider public policy objective.”

Bitcoin boom to bust

The issue of trust, or lack thereof, extends to Bitcoin too, with it failing to become a truly viable and widely adopted digital currency despite early adopters and evangelists touting its potential to replace fiat money and right the wrongs of the current financial system.

Even with its many proponents, the cryptocurrency is yet to receive a stamp of approval from the wider population and regulators remain sceptical, with Bitcoin’s image tainted by its popularity among criminals in the dark economy due to its lack of transparency. Bitcoin is also a highly speculative market, prone to flash crashes and fails to meet the three main functions of money: a medium of exchange, a unit of account, a store of value.

“You don’t want to store a large amount of your personal wealth in something that might drop dramatically in value in the next hour,” Patel said. Despite many expecting China to launch its own digital currency this year, along with the Bank of England and other central banks across Europe looking at the potential for issuing their own state-backed coins in response to Facebook’s Libra, advanced economies are in no rush.

The reason being, explains Patel, is that advanced economies already boast a strong payments infrastructure. However, in smaller and emerging economies, there is greater motivation to issue their own central bank digital currencies (CBDCs).

In fact, the most progress has occurred in the island nation of the Bahamas, with its central bank unveiling its digital ‘Sand Dollar’ in December 2019. The faster adoption of CBDCs for island nations like the Bahamas, is multi-faceted, explains Patel.

Managing and distributing cash is costly, it also helps create a more resilient currency and payments infrastructure in a country that is prone to things like natural disasters. And with the Sand Dollar – one of the most sophisticated CBDCs to date – it could well serve as the blueprint for others to follow in the years ahead.

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